Analysis: Iran’s presidential election and the prospects for reform

Iranian politics is usually characterised by a political contestation between two broadly defined camps: Hardliner conservatives and moderate reformists. In Iran’s May 19 presidential elections, reformist incumbent President Hassan Rouhani competed against hardliner Ebrahim Raisi. Rouhani won a landslide victory, receiving approximately 57 percent of the vote. Rouhani has won the presidential elections on promises of a political and economic reform, prosperity, more jobs, and further opening up the country to the global market.

Understandably, the economy was the most important issue in the election. The nation suffered from negative growth rates in 2012, 2013, and 2015, largely due to the economic sanctions imposed by the United Nations on Iran over its disputed nuclear programme. Rouhani signed a historic nuclear agreement, called the “Joint Comprehensive Plan of Action (JCPOA),” with the United States, Russia, China, and the European Union in 2015, agreeing to significantly curb his country’s uranium enrichment projects in return for the lifting of most sanctions. Most Iranians (76 percent) indicated their support for the deal, with an expectation that the agreement would end Iran’s isolation and reinvigorate its economy.

The JCPOA released nearly $30 billion frozen Iranian assets, removed the oil embargo and EU sanctions, and allowed non-US banks to resume their businesses with Iran. Following the agreement, SWIFT has reconnected Iranian banks to the global transaction network, enabling oil traders to transmit payments to Iran. Airbus and Boeing have sold new passenger planes to Iran, Total and Shell have agreed to undertake energy investments, and Renault and Peugeot-Citroen have signed deals with Iranian companies to produce some of their models in the country to reclaim some of their lost market shares.

Iran’s GDP grew by 6.5 percent in 2016 and inflation has dropped to single digits. Oil exports averaged 1.4m barrels/day in the 2015/2016 fiscal term but are expected to average 2.4m barrels/day in 2016/2017. However, unemployment remains high at 12.5 percent and growth in the non-oil sector was only 0.9 percent in 2016. Unemployment is likely to persist unless the non-oil sector experiences significant growth. But Iranian firms have difficulties to access finance as international financial investors still hesitate to enter Iran. Most sanctions on Iran have been lifted, but US sanctions remain in place, which significantly hurts the credit ratings of the country and its firms and makes dollar-based transactions risky for global companies. Also, US President Donald Trump is unwilling to back the nuclear agreement and even stated that it is “one of the worst deals ever signed,” which creates uncertainties on the future of the deal.

According to a February 2017 IMF report, President Rouhani needs to undertake a comprehensive banking reform to attract foreign investors and create jobs. But it is very difficult for his administration to challenge the establishment and initiate any major economic reform. He is actually expected to transform an economy that he has little control over. The country’s powerful Islamic Revolutionary Guards Corps (IRGC), which reports directly to the supreme leader, runs a multi-billion dollar business empire that accounts for a quarter of Iran’s GDP. The IRGC is hostile to any foreign direct investment or reform that challenges its dominance. Moreover, Supreme Leader Ayatollah Ali Khamenei, who has a veto power over any legislation, clearly took the sides of the hardliners during the election and called for a “resistance economy,” in which he envisioned an inward-oriented economy that emphasises self-sufficiency and import substitution, a policy line that suits the interests of the IRGC and contradicts Rouhani’s economic agenda.

President Trump further complicates Rouhani’s business. In addition to his harsh rhetoric on Iran and threats to end the nuclear deal, he has recently signed a major arms sale agreement with Saudi Arabia, Iran’s major rival in the region. US arms sale to Saudi Arabia puts extra pressures on the Rouhani administration and forces it to increase military budget at the expense of social spending or infrastructure investments.

Iran’s May 19 presidential election has shown that most Iranians approve the nuclear deal, support Rouhani’s engagement with the West, and are eager for a change. However, Rouhani’s domestic authority is limited and any significant political or economic reform in Iran seems unlikely. But Iran’s supreme leader Khamenei is now 77 years old and in poor health. His death may strengthen Rouhani’s relative position and even pave the way for a significant change in Iran. Global powers should support Rouhani’s administration by removing the remaining sanctions, avoiding harsh rhetoric, and encouraging international businesses to invest in Iran as reformists’ future in Iran may depend on his success as president.